Go Electrical Pty Limited v Neil Gregory McGarvey

[2009] NSWDC 312

CITATION:	Go Electrical Pty Limited v Neil Gregory McGarvey & Ors [2009] NSWDC 312
HEARING DATE(S):	4 November 2009
EX TEMPORE JUDGMENT DATE:	4 November 2009
JURISDICTION:	Civil
JUDGMENT OF:	Rolfe DCJ
DECISION:	See paras 29 & 30 of Judgment
CATCHWORDS:	Insolvent trading claim under s 588G (2) of the Corporations Act (2001) - Proof of matters necessary for showing that directors knew or a reasonable person in their position ought to have known of debtor company's insolvency - Consideration of balance sheet - Financial statements and Opinions of liquidator.
LEGISLATION CITED:	Corporations Act (2001)
CASES CITED:	Quick v Stoland (1998) 87 FCR 371
PARTIES:	Go Electrical Pty Limited (Plaintiff) Neil Gregory McGarvey & Ors (Defendant)
FILE NUMBER(S):	5567/08
COUNSEL:	M A Jones (Plaintiff) R Kato (Defendants)

JUDGMENT

1 These proceedings arise out of the supply of goods provided by the plaintiff, Go Electrical Pty Limited, to a company known as Rolls Electrical (Qld) Pty Limited, which I will refer to as the “Debtor”. The plaintiff’s case is that the Debtor was indebted to it in the sum of $144,000, in round figures, as at 22 January 2007, which is the date upon which Mark Pearce and Christopher Palmer, Chartered Accountants, were appointed administrators of the Debtor. The Debtor has not paid the amount owing to the plaintiff and that is not disputed on the evidence.

2 The plaintiff’s claim is against the three defendants in their capacities as directors of the Debtor. The plaintiff’s claim is that, in contravention of s 588G(2) of the Corporations Act (2001), (the “Act”), the three defendants failed to prevent the Debtor from incurring debts when they were aware, or a reasonable person in their position in the circumstances that the Debtor was in, would have been aware, that the Debtor was insolvent, that the Debtor became insolvent by incurring the debts owing to the plaintiff and that there were reasonable grounds for suspecting that the Debtor was insolvent.

3 On 16 February 2007 Messrs Pearce and Palmer were appointed liquidators of the Debtor. On 24 July 2008 the plaintiff gave notice to the Debtor, through the liquidators under s 588S of the Act, that it intended to bring proceedings against the defendants pursuant to s 588M of the Act, which, in effect, entitles the plaintiff to recover the amount of its debt owed by the Debtor in the event that it can establish a breach or contravention by the defendants of the provisions of s 588D(2) of the Act. The evidence is overwhelming in favour of the plaintiff’s claim.

4 First of all Ms Dobson’s evidence in exhibit A goes to the formal matters relating to proof of the plaintiff’s debt, which is not disputed by counsel for the defendants. I should also add that the liquidators have admitted the plaintiff’s proof of debt in the liquidation for the full amount claimed. Ms Dobson gives her evidence in her capacity as a credit supervisor in the employ of the plaintiff. She exhibits to her affidavit the application for commercial credit submitted successfully by the Debtor to the plaintiff and the plaintiff’s terms and conditions, which require payment by the Debtor within thirty days for goods invoiced to it. Ms Dobson’s evidence establishes that between 2 October 2006 and 18 January 2007 the plaintiff supplied goods to the Debtor to the total value of $144,332.16. Also, exhibited to her affidavit is a bundle of invoices which prove the amount owing to the plaintiff and which also demonstrate that the individual amounts were owing for periods well in excess of the contractual thirty day period for payment agreed to between the plaintiff and the Debtor.

5 Apart from Ms Dobson’s evidence, the plaintiff seeks to prove its case with reference to the material contained in the affidavit of Mr Palmer and the documents exhibited thereto, all of which are contained in exhibit B. Mr Palmer in the affidavit in this court sworn on 18 September 2009 sets out the formal matters relating to his appointment, his curriculum vitae and the other matters that go to establish his expertise as an insolvency practitioner and a person able to give expert evidence concerning the proof of the matters relied on by the plaintiff. He also, as part of this course, annexes his affidavit in proceedings 2805/07 in relation to the Debtor commenced in the Supreme Court of New South Wales Equity Division, Corporations List.

6 The evidence of Mr Palmer and the documents he relies on show that as at 30 June 2006 the Debtor had accumulated losses in round figures in the amount of $358,000, and that it had negative equity in that amount. In his report to creditors, as an administrator, dated 8 February 2007, Mr Palmer set out that he and Mr Pearce were appointed jointly and severally administrators of the Debtor on 22 January pursuant to s 436A of the Act. S 436A provides that a company may appoint an administrator if the board has resolved to the effect that in the opinion of directors voting for the resolution, a company is insolvent or is likely to become insolvent at some future time, and that an administrator for the company should be appointed.

7 Although there was no copy of the resolution that was passed, the court can infer that the three director/defendants were participants in the passing of the resolution and were certainly bound by it, and that nothing was done by them to contest the fact that there was any issue as to the insolvency of the Debtor. In other words, the plaintiff says it can rely on the operation of that section as an admission by the directors of the Debtor’s insolvency. I accept that submission; but the plaintiff’s case does not rise or fall simply on the strength of that. The other evidence is ample enough of its own to support the plaintiff’s case.

8 The next document relied on by the plaintiff is the Debtor’s balance sheet as at 21 January 2007, which showed a negative equity of $241,812.36; that is to say a deficiency in net assets in that amount. The balance sheet disclosed that as at that date the company had suffered a net loss for the period 1 July 2007 to 22 January 2007 in the order of $207,990.

9 If these matters are not enough to demonstrate that the Debtor was in dire straits, one only needs to turn to the Report As To Affairs which was signed by all three defendants. The Report As To Affairs is dated 22 January 2007, and it is at tab 4 of Mr Palmer’s affidavit in the Supreme Court proceedings. The Report As To Affairs is required under the provisions of s 475(1) of the Act and is required to be in the form of form 507A.

10 The Report As To Affairs, as I have said, was signed by all three, certified by all three on p 8 as to be true to the best of their knowledge and belief, and was verified for the purposes of s 475(1) by each of the three of them on 24 January 2007.

11 The report itself discloses that although the book value of assets was in the order of $943,000, in round figures, the defendants estimated that the realisable value of those assets was only $418,000 and that there was an estimated deficiency, after taking into account unsecured creditors of $1,260,979, of $1.2 million.

12 I accept Mr Jones’ submission, looking at those materials so far, and in particular the company’s own documents that I have referred to, that the court can infer that the defendants in fact would have had an idea of and an understanding of the company’s balance sheet and profit and loss statements, and certainly a reasonable director in the position of each of those three would have had a general understanding of the company’s financial position, evidenced by both of those documents.

13 I interpolate here that it is true that in the initial report of 8 February 2007, in his capacity as an administrator, Mr Palmer said on p 10 when dealing with insolvent trading that he did not express a concluded opinion as to whether or not the directors allowed the company to trade whilst insolvent. He said it would not be unreasonable to conclude that the directors may have allowed that to occur and that was latched upon by counsel for the defendant.

14 If one looks at Mr Palmer’s report as a whole and the section dealing with insolvent trading, first of all the insolvent trading section contains a number of what I might describe as motherhood statements, but more importantly it goes on to say that steps needed to be taken to investigate what the true position was, and that is in fact what Mr Palmer did subsequently and his detailed analysis is set out in his affidavit in the Supreme Court.

15 The effect of his evidence, which I accept and from which I independently conclude myself, with reference to the materials in evidence, is that, as I said earlier, the directors themselves and a reasonable director in their position, would have been familiar with the books and records of the Debtor. I am also comfortably satisfied that a reasonable director could not but have known that the Debtor was in dire financial circumstances.

16 Mr Palmer expresses the opinion that the Debtor was insolvent from at least 30 June 2006 and remained insolvent throughout that period of time up until the appointment of him and Mr Pearce as joint administrators on 22 January 2007. That is important because that period covers the period in which the plaintiff’s debts were incurred by the Debtor.

17 I will not set out the whole of Mr Palmer’s affidavit in detail. It leads him to a conclusion which I accept. I will refer to some of the detail because it demonstrates beyond doubt in my opinion that the directors knew, or a reasonable director ought, in their position, to have known, that the Debtor was trading whilst insolvent, and that they knew, or a reasonable director ought to have known in their position, that it was unable to pay its debts, as and when they fell due.

18 For example, Mr Palmer gave evidence that the recoverability of the Debtor’s assets recorded in the books of the Debtor in the order of $830,000 was misleading because a very substantial portion of that amount was contested by those third parties from whom the amount was said to be owing. For example, the largest trade debtor was McConaghy Group Pty Limited. According to the defendants it owed $291,000 to the Debtor but there was litigation over the recoverability of that amount. That is just by way of example. Mr Palmer then undertakes a balance sheet analysis starting at para 34. The analysis of the Debtor demonstrates quite clearly that as at 30 June 2006 the then current liabilities of the Debtor exceeded what was recorded in its books as current assets by an amount of $300,000. The position had worsened as at 22 January 2007 when the gulf had widened to nearly $600,000.

19 On this aspect, Mr Jones referred me to what Emmett J had said in Quick v Stoland (1998) 87 FCR 371, specifically at p 380, “In a situation such as this, where liabilities exceed assets, that in itself is evidence of insolvency.” And that fact is demonstrated by the material I have just referred to. In any event, Mr Palmer goes on in more detail to demonstrate that fact with reference to what is described as the “current ratio” at para 35b and the Debtor’s failure to come up to scratch, if I can put it that way, in that respect. Likewise, he goes on in para 35c to say again that the Debtor fails to meet what is described, apparently, by insolvency practitioners, as “the acid test”.

20 In addition, Mr Palmer notes that a substantial amount was owed by the defendants to the Debtor by way of directors’ loans. The amount was $282,000. Mr Palmer came to the conclusion that the defendants were unable to repay that amount to the Debtor company, thus reinforcing the conclusion he came to that the Debtor was insolvent. The adjustments that he makes consequentially upon all of the matters referred to in this paragraph of his affidavit are on p 9. In subpara (i) he estimates a net asset deficiency after adjustments of in excess of $1.1 million.

21 Mr Palmer goes on to deal with cash flow in paras 36 and following of his affidavit. That evidence establishes that the Debtor was, during the relevant period, operating its account in excess of the overdraft limit applied by the secured creditor, Suncorp Metway Limited. It also demonstrates that the Debtor’s cash flow was appalling because its aged debtors had significantly blown out - even apart from the other issue of whether or not those debtors owed those amounts recorded in the Debtors’ books as being owed.

22 In fact, the position was, at the time the administrators were appointed, that approximately eighty-two per cent of the Debtors’ debts had been owing since 31 October 2006 or earlier, which to my mind of itself demonstrates that the company was in dire straits and that none of the defendants could not have been aware of that position.

23 Mr Palmer, to reinforce the conclusion he came to, also deals with the position of trade creditors and demonstrates that amounts were owed to those trade creditors for significant periods of time. For example, the largest trade creditor, Ideal Electrical Supplies Pty Limited, had an amount owed to it of in excess of $600,000 of which approximately $376,000 was owed for more than thirty days. Other creditors were in a similar position.

24 Finally, Mr Palmer took into account whether or not funds could be obtained by the directors of the Debtor in order for it to continue. He came to the conclusion in effect that the related entities were neither willing nor able to provide funding to the company.

25 For all those reasons I accept Mr Palmer’s evidence.

26 The approach taken by counsel for the defendant was to put the plaintiff to proof. It would be clear from what I have just said that the plaintiff has done just that. I should also add that a number of separate submissions were made to the effect that the court should take into account that there was no evidence of a poor relationship between the plaintiff and the Debtor or the defendants before the administrators were appointed and it was suggested that there was no knowledge on the part of the plaintiff as to the matters it now relies on. I do not accept that submission because the plaintiff cannot have been expected to have had any knowledge of what was going on internally within the affairs of the Debtor, nor what the defendants were doing or were up to.

27 As far as the bank was concerned, as I said a little earlier, the evidence shows that Debtor had gone outside its formal limit, which to my mind demonstrates that it was in very difficult circumstances and the fact that the bank tolerated it does not mean at all that the Debtor was not insolvent. The evidence demonstrates that although the bank was a secured creditor, it still proved in the winding up for an amount representing the difference between the value of its securities and its debt. One would rather have thought then, in the circumstances, that the bank may have been hoping that maybe the Debtor would trade itself out of the difficulties it was in, but that is speculation and I do not need to go down that path.

28 As Mr Jones for the plaintiff has submitted, s 588(2) has two limbs. Subsection (a) looks at whether a particular director was subjectively aware at all times during the relevant period of the specific facts constituting reasonable grounds for suspecting the insolvency of a company. I infer from the materials I have referred to that the three defendants held that suspicion and I am also satisfied under the section limb, subs 2b that a reasonable person in the position of the defendants would have had the suspicion.

29 So for those reasons, I am satisfied the plaintiff is entitled to succeed on its claim. There will be a verdict in favour of the plaintiff against the defendants in the amount of $144,332.16. I order the defendants to pay the plaintiff interest in the amount of $39,289.99. In the result, there will be` judgment in favour of the plaintiff against the defendants in the amount of $183,622.15.

30 I order the defendants to pay the plaintiff’s costs of the proceedings; such costs be agreed or assessed on the ordinary basis up to and including 9 September 2009 and thereafter on an indemnity basis. I direct that the exhibits be returned.

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